2018-0781651E5 Indian Employment Income – Guideline 4

Principal Issues: Whether employment income would be exempt from tax under Guideline 4 of the Indian Act Exemption for Employment Income Guidelines.

Position: No.

Reasons: In the situation provided, the Employer is not resident on a reserve; it is not an Indian band which has a reserve or a tribal council representing one or more Indian bands which have reserves, nor is it an Indian organization controlled by one or more such bands or tribal councils.

Author: Gauthier, Michel
Section: 81(1)(a)

XXXXXXXXXX                                                                                                                                           2018-078165
                                                                                                                                                                   Michel Gauthier

February 19, 2019

Dear XXXXXXXXXX:

Re: Indian Employment Income – Guideline 4

This is in reply to your email dated October 10, 2018.  In your email you ask whether the employment income of an Indian, as that term is defined in section 2 of the Indian Act, would be situated on a reserve and thus exempt from tax for purposes of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act.

More specifically, you have asked us to comment on whether your employment income XXXXXXXXXX, would be exempt from tax under Guideline 4 of the Indian Act Exemption for Employment Income Guidelines (the “Guidelines”).

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

Based on your email, it is our understanding that:

*     You are employed by the XXXXXXXXXX (Employer) in the XXXXXXXXXX that is dedicated to providing professional XXXXXXXXXX.

*     Your duties of employment are performed primarily off reserve from your Employer’s office in XXXXXXXXXX, however, you are occasionally required to work on a reserve.

*     You do not live on a reserve.

Paragraph 81(1)(a) of the Income Tax Act, together with paragraph 87(1)(b) of the Indian Act provides that “the personal property of an Indian or a band situated on a reserve” is exempt from taxation. The courts have determined that income from employment is personal property for purposes of section 87.  The Supreme Court of Canada, in Williams v. The Queen, 92 DTC 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor.

To simplify the application of this “connecting factors test” with respect to common employment situations, the CRA, together with interested Indian organizations, developed the Guidelines.  For details on the Guidelines, please go to https://www.canada.ca/en/revenue-agency/services/aboriginal-peoples/indian-act-exemption-employment-income-guidelines.html.

Guideline 4 provides an exemption for employment income where the following conditions are met:

a)    The employer is resident on a reserve;

b)    The employer is:

*     an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves; or

*     an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves; and

c)    The duties of employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indian's who for the most part live on reserves.

In the situation you have described, your Employer, is not resident on a reserve; it is not an Indian band which has a reserve or a tribal council representing one or more Indian bands which have reserves, nor is it an Indian organization controlled by one or more such bands or tribal councils. Therefore, it is our opinion that Guideline 4 will not apply to your situation.  However, the occasional work you perform on a reserve may qualify under the proration rule in Guideline 1.

Occasionally there may be unique situations for which additional connecting factors are relevant and should be taken into consideration.  Connecting factors that have been considered and given weight by the courts in cases involving employment income include the location or residence of the employer; the nature, location and surrounding circumstances of the work performed by the employee; the nature of any benefit that accrued to the reserve from the work; and the residence of the employee. The weight assigned by the courts to these factors has varied according to the facts of each particular case.

In this regard, you have also asked us to consider a view that since all of your duties are in relation to or supporting First Nation communities regardless if the work is performed on a reserve, your employment income should be exempt.

As the Federal Court of Appeal said that, in the case of Akiwenzie v. the Queen (2004 DTC 6007), the fact that an employee's duties were beneficial to reserves cannot itself result in his income being situated on these reserves.  The decision cites the case of Monias v. the Queen (2001 DTC 5450) in which the Federal Court of Appeal previously stated:

“That the work from which employment income is earned benefits Indians on reserves, and indeed may be integral to maintaining the reserves as viable social units, is not in itself sufficient to situate the employment income there. It is not the policy of paragraph 87(1)(b) to provide a tax subsidy for services provided to and for the benefit of reserves….”

We trust that these comments will be of assistance.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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